Honorable Trinidad Navarro, Ins. Comm'r of State, in His Capacity Co. v. Patriot Nat'l, Inc. (In re Patriot Nat'l, Inc.)

• Court: U.S. District Court — District of Delaware
• Writing for the Court: ANDREWS, UNITED STATES DISTRICT JUDGE
• Citation: Honorable Trinidad Navarro, Ins. Comm'r of State, in His Capacity Co. v. Patriot Nat'l, Inc. (In re Patriot Nat'l, Inc.), 623 B.R. 696 (D. Del. 2020)
• Decision Date: 30 September 2020
• Docket Number: Civ. No. 18-751 (RGA),Case No. 18-10189 (CSS) Jointly Administered
• Parties: IN RE: PATRIOT NATIONAL, INC., et al., Debtors. Honorable Trinidad Navarro, Insurance Commissioner of the State of Delaware, in his capacity as Receiver of Ullico Casualty Company In Liquidation, Appellant, v. Patriot National, Inc. and Cerberus Business Finance, LLC, Appellees.

623 B.R. 696

IN RE: PATRIOT NATIONAL, INC., et al., Debtors.

Honorable Trinidad Navarro, Insurance Commissioner of the State of Delaware, in his capacity as Receiver of Ullico Casualty Company In Liquidation, Appellant,

v.Patriot National, Inc. and Cerberus Business Finance, LLC, Appellees.

Case No. 18-10189 (CSS) Jointly Administered

Civ. No. 18-751 (RGA)

United States District Court, D. Delaware.

Signed September 30, 2020

Neil B. Glassman, GianClaudio Finizio, Sophie E. Macon, Bayard, P.A., Wilmington, Delaware, attorneys for the Appellant.

Adam G. Landis, Landis Rath & Cobb LLP, Wilmington, Delaware; Michael L. Cook, Adam C. Harris, William H. Gussman, Jr., Schulte Roth & Zabel LLP, New York, New York; attorneys for Appellees Guardia, LLC and Cerberus Business Finance, LLC.

Chapter 11

MEMORANDUM OPINION

ANDREWS, UNITED STATES DISTRICT JUDGE:

This matter involves two insolvency estates – one bankruptcy and one insurance – in two different forums. The appeal has been filed in the bankruptcy cases of Patriot National, Inc. ("PNI") and certain affiliates ("Debtors") by the Honorable Trinidad Navarro, Insurance Commissioner of the State of Delaware, in his capacity as receiver ("Receiver") of Ullico Casualty Company. The Ullico estate was created on May 30, 2013 when the Court of Chancery of the State of Delaware entered its Liquidation and Injunction Order with Bar Date ("Liquidation Order") pursuant to the Delaware Uniform Insurers Liquidation Act, 18 Del. C. § 5901 – 5944 ("DUILA"). ¹

The Debtors' bankruptcy estate was created years later upon the filing of their chapter 11 petitions on January 30, 2018. Under the authority of the Liquidation Order, which requires the Receiver to marshal and recover assets and administer Ullico's estate for the benefit of creditors, the Receiver filed a petition to compel accounting and turnover of collateral from non-debtor Patriot Underwriters, Inc. n/k/a Guarantee Underwriters, Inc. ("GUI") on March 13, 2015.² The parties dispute whether a proper accounting was provided, and the Receiver sought to preserve his rights in connection with the Debtors' plan.

The Receiver objected to confirmation on the basis that the proposed plan would impair his rights under DUILA and the Liquidation Order in violation of the McCarran-Ferguson Act,³ that abstention was required under various statutes and doctrines,⁴ and that the plan was not proposed in good faith in accordance with § 1129(a)(3) of the Bankruptcy Code. The Receiver further objected to a provision contained in the proposed plan which provided that the Bankruptcy Court would have "exclusive jurisdiction" to adjudicate claims and litigation "arising out of, and related to, the Chapter 11 Cases and the Plan." (D.I. 1-1, Art. X).

At the April 24, 2018 confirmation hearing, the Bankruptcy Court issued a bench ruling determining that the McCarran-Ferguson Act did not apply and that abstention was not warranted. (A1065-68). Following supplemental briefing on the retention of exclusive jurisdiction provision, on May 2, 2018, the Court entered a separate order (D.I. 1-2) ("Jurisdiction Order"), which determined that the Bankruptcy Court's retention of exclusive jurisdiction provision "does not, at the moment, prejudice any party" and ordered that the Confirmation Order contain language making it subject to objection by any party which believes its rights are being infringed upon. Thereafter, on May 4, 2018, the Court entered an order confirming the Debtors' plan (D.I. 1-1) ("Confirmation Order"). The Receiver has appealed the Confirmation Order and Jurisdiction Order on the basis that they unlawfully impede and interfere with his rights under the Liquidation Order and DUILA. For the reasons set forth below, the Court will affirm both orders.

I. BACKGROUND

A. The Parties

In 2009, insurance company Ullico entered into relationships with non-debtor Patriot Underwriters, Inc., now known as GUI, to provide workers' compensation insurance through a program marketed and operated by GUI (the "Ullico/Patriot Program"). GUI provided "turn-key" insurance services to Ullico, which allowed its capital to be used to backstop losses from covered workers compensation risk. Virtually all other aspects of the insurance operation were handled by the non-insurer service providers, including sales, marketing, management, underwriting, policy issuance, administration, accounting, claims handling, premium collection and disbursement, collateral collection and disbursement, and subrogation (collectively, the "Ullico/Patriot Program Services"). (See A0233, 0278). Numerous Ullico large-deductible workers compensation insurance policies were issued through the Ullico/Patriot Program. Pursuant to the "Large Deductible Endorsement" attached to the policies, Ullico was authorized to advance part or all of the applicable deductible amounts, and the insured was required to reimburse Ullico for payments made by the company that were within the deductible. (See A0339; A0368; A0380). In order to secure repayment of the deductible and other payments which became due from the insured to Ullico, the insured was required to provide collateral prior to the issuance of the policy. (A0380). GUI entered into program agreements with Ullico insureds that required the insureds to deposit collateral with GUI. (A0385; A0406; A0428).

B. The Liquidation

On May 30, 2013, the Court of Chancery entered the Liquidation Order placing Ullico into liquidation pursuant to §§ 5905 and 5906 of DUILA. The Receiver is vested with "all right, title and interest in, of or to, all of the property of [Ullico]" (A0027-0030, ¶¶ 1-3 and 7); see also 18 Del. C. § 5913(b). The Liquidation Order includes a number of provisions authorized by 18 Del. C. § 5904(b) to assist the Receiver in one of his core functions: to marshal the assets and possible assets of the estate. The Liquidation Order prevents the dissipation of Ullico's assets or assets that it may have an interest in; requires the person or entity in possession of the assets to file an accounting of those assets with the Receiver; and mandates that all assets be turned over to the Receiver. (A0031-0032 at ¶¶ 8–10). Paragraph 9 of the Liquidation Order provides:

9. Except as otherwise indicated elsewhere in this Order or except as excluded by express written notice provided by the Receiver, all persons or entities holding Assets of, or on behalf of, ULLICO CASUALTY shall file with the Receiver within ten (10) calendar days of the entry of this Order an accounting of those Assets, regardless of whether such persons or entities dispute the Receiver's entitlement to such Assets.

(A0031 at ¶ 9). The Liquidation Order prohibits all persons or entities from "exercising any right adverse to the right of ULLICO CASUALTY to or in the Assets, or in any way interfering with the Receiver, the Deputy Receiver(s), or the Designees either in their possession and control of the Assets or in the discharge of their duties hereunder." (A0032 at ¶ 11). Through the Liquidation Order, estate assets are marshaled for the purpose of administering them, including distributing assets consistent with DUILA and the Liquidation Order. See DUILA § 5918.

C. The Petition to Compel Accounting and Turnover

Within months of Ullico being placed into liquidation, GUI and its affiliates began an operational restructuring which took place between 2013 and 2015. The operational restructuring was purportedly designed to separate the insurance-risk-taking business ("Guaranty Silo") from the Debtors' non-risk-bearing insurance-services business ("Patriot Silo"). (See A0076 ¶ 18). The restructuring is reflected in the 2013-2015 organization charts contained in the regulatory filings of Guaranty Insurance Company ("GIC") with the Florida Office of Insurance Regulation. (A0227-0232). The charts also reflect the restructuring of the Ullico/Patriot Service Providers from the Guaranty Silo to the Patriot Silo; Patriot Risk Services was part of the Patriot Silo in 2013, and Patriot Claims Services moved from the Guaranty Silo to the Patriot Silo between 2013 and 2014. Id. Each of the Ullico/Patriot Service Providers are debtors in the chapter 11 cases.

On March 13, 2015, the Receiver filed the Petition to Compel Accounting and Turnover (A0043),⁵ which included a demand for the accounting and turnover of over $26,000,000 of Ullico Collateral which GUI reported, as of March 12, 2013, was being held in connection with the Ullico/Patriot Program (the "Ullico Collateral"). (A0059-0060). The Receiver alleges that the Debtors transferred Ullico Collateral by moving it from the Guaranty Silo to the Patriot Silo, consistent with the movement of the Ullico/Patriot Service Providers, and that the Ullico/Patriot Service Providers, consistent with their insurance-services business roles, were likely to have possessed and controlled the Ullico Collateral.

The parties dispute whether a proper accounting has been provided. In response to discovery requests, Debtors provided some bank account statements for account 5225 titled "Patriot Risk Services, Inc. Ullico Casualty" (the "Patriot/Ullico Account") for the period January 1, 2012 through August 31, 2017 (A0485-0525). The Patriot/Ullico Account is designated as a "restricted account" by the Debtors. (See A0170 (identifying account 5225 as a "restricted account")). The Debtors' restricted accounts hold collateral in trust for the benefit of third parties. Debtors acknowledge that property held in restricted accounts (of which there were over two hundred as of the Petition Date) did not constitute property of the Debtors' bankruptcy estate and will not be transferred pursuant to the reorganization. (A0130-0131 at ¶ 8; A0901 at 92:13-24). According to the Receiver, the activity reflected in the Patriot/Ullico Account reflects ongoing deposits and withdrawals of millions of dollars during the period when the Ullico/Patriot Program was active, and during the period immediately...